Jobless Growth in India

Overview

Three years ago, when the Modi Government came into power, it was promised that they would create more than 10 million jobs for the youth of the country. India has such a strong demographic dividend that more than 65% of its population below the age of 35 years. Prima facie, it seems like a good progressive story, with India on track to experience a growth of 7.7% in the coming year. However, the underlying fact is that most of this growth has come about without a similar growth in jobs- Jobless Growth. To quantify this in numerical terms, 1 million people are added to the workforce every month, but only 0.01% of the new workforce actually finds work in the year. This does not seem right, or fair for the youth of the country who trusted in our current Prime Minister to help them have a secure future.

Job creation has not kept up with the growing working age population

Growth in Service Sector and Automation

This decline in employment creation is due to the fact that the service sector has been the major contributor to the growth of the economy. Unfortunately this sector is less labour intensive. Services like IT, Business and financial services require only 1-2 people to produce Rs. 1 million of Real Value Added GDP. The IT sector is currently going through massive structural reforms. Many jobs like coding and designing can now be done by computers itself. This has reduced the need for more people. Similarly, the technology of cloud computing might actually reduce the number of humans required. The Manufacturing sector has similar problems due to the onset of automation. No longer is labour cheap in India, while machine production seems more viable and cheap. On these lines, manufacturing jobs which were offshored by the Western countries to India and China are now being back-shored to their home countries. The coming to power of Trump who has promised similar things for Americans might make situations worse for people in India. Moreover, the reduction in work visas for Indians in many countries will have the effect of reducing the number of work contracts for Indian companies. A World Bank research has stated that automation threatens 69% of jobs in India. As we move towards this phase of automation, companies that manufacture machineries and capital goods are likely to do well and hence could be considered as a safe investment option in the short to medium term.

Poor Quality of Education

The second reason for the lack of creation of enough jobs is the poor quality of education in India. Literacy rates in India are lower than most other developing countries, and the quality of education too is poor. A report revealed that more than 50% of the rural kids in 5th Standard could not read basic sentences, and 70% of them could not do basic division. Inequality in access to education is very large, with less than 40% of the children from the poorest fifth of the population attend secondary schools, compared to 72% for the richest fifth of the urban population, as reported by an NSSO Survey. Even though we have a huge proportion of our population in the school going age, the expenditure on education as a percentage of GDP is less than 4%. The percentage of youth in the age group of 15-29 years who are neither employed nor in education, nor in training, is one of the highest in the world. Serious investments need to be made to improve the quality and access to education, and the government has promised to look into this. Investment in shares of companies in the education sector can thus be a long term investment option.

Literacy RatesPublic Spending on EducationSchool Age Population Share

Stringent Labour Laws

Another major hurdle which seems to prevent more creation of jobs is the complexity and stringency of labour laws in the country. Employment protection laws, social security laws, minimum wage laws, laws related to working conditions, all are extremely complex and are to be complied with. This becomes especially difficult for the manufacturing sector industries which employ a great number of people. Compliance to such laws restricts them from firing people, and also adds to their costs, as a result of which they do not perform well, or hire people on a temporary or daily basis, and shift to capital intensive methods of production. Of late, the government has realised this problem and has started to ease the labour laws and administrative requirements a little, but these are only small steps. The best path would be to not discriminate organisations in compliance of the various labour laws with regards to the size of the enterprise. If this happens, no company would like to remain small just because of the fear that if they grow in size they will have more laws to comply to. On similar grounds, taxation laws need to be simplified and made non-discriminatory too. Hence, there is potential for growth of small manufacturing companies, but only when tax and labour laws are made flexible.

Employment Protection laws are stringent

The need for Investments

An HSBC report revealed that in 2015-16, public investments increased by 21% but private investments contracted by 1.4%. This percentage seems small, but considering that private investment is 75% of our country’s investment demand, the volume is large. Even World Bank data reveals that Gross Capital Formation in the country has witnessed a declining trend past few years. Private investment is a major driver of growth in our economy. Changes need to be made to induce more of it. With more investments more jobs will surely be created. What the government can do is make more investment in the form of infrastructural development, like roads, or communication etc. This will lead to “crowding in” of private investments, rather than “crowding out” as one might naturally feel due to a logical rise in interest rates if more investment is done, because facilities for making use of the investments would be better, and hence returns would be higher. This would increase business confidence, which has seen a downward trend for sometime. It is rising, but it is up to the government to provide the impetus for private players to vote.

Business Confidence in India

Conclusion

Unemployed people are a risk not only for the growth potential of the economy, but also for nationwide peace. With unemployment, the risk of social unrests, protests, strikes etc. loom over us. The sooner the government realises the hurdles and takes steps, the better it is. With two years remaining before the 2019 Lok Sabha elections, one can naturally expect the BJP government to step up their actions with the aim to win the popular support again. Like any other project related to the government, the goal to increase employment and improve the current infrastructure will have to go through the litmus tests of corruption, red tapism, bureaucracy and time lags. With greater employment, international competitiveness and efficiency, it would not be surprising to see India achieve a double digit growth rate in the coming 4-5 years if all goes according to plan.